Cryptocurrency and its diverse applications, such as DeFi, will likely dominate the future. Bitcoin was the first drop of water that sent out ripples into the world of cryptocurrency. It allowed the elimination of intermediary parties such as banks since individuals agreed on payment terms through smart contracts. This article will walk you through DeFi layers to give you a clear picture of how it works.
Are you fed up with traditional financing procedures? DeFi might just be the answer you were looking for.
What is DeFi?
An individual can gain access to DeFi if they have a stable internet connection. Unlike the traditional financing system, your payment can’t be restricted or blocked. This convenience is made possible due to the absence of a centralized authority.
The conventional financing method heavily relies upon credit scores. These scores would then determine your eligibility to apply for a loan. Due to the absence of a regulatory authority in DeFi, your payments and services can’t be blocked.
DeFi allows for a secured system that is backed up by code. Hence, making it easier to inspect and rectify any possible errors. This innovative system is not restricted to any borders and can be used freely by anyone.
Peeling of the DeFi Layers
Settlement Layer
Dissecting the DeFi layers is crucial to the understanding of its working mechanism. As all DeFi transactions are built on this layer, it is often referred to as Layer 0. It consists of two crucial components that allow its optimal functioning. One component would be its public blockchain, whereas the other would be cryptocurrency.
Examples of settlement layers are Ethereum and its native token (ETH). This feature allows it to be traded on various crypto exchanges. The value of this layer is determined by how well it interacts with its users. If the interaction between users and the settlement layer is high, it becomes easier to increase operational scalability.
The definition and the scope of the settlement layer have expanded with time. These are now optimized to a tokenized version of real-world assets such as real estate. Decentraland by Metaverse has brought this concept into the spotlight.
Protocol Layer
DeFi system is based upon the software protocol, also referred to as Layer 1. This second of the DeFi layers consists of rules and regulations that dictate different tasks and activities. These guidelines are set by various companies operating in the industry.Â
Organizations can use this layer to simultaneously build a service or an application. The protocol layer has the ability to liquidate, which helps create monetary value. This value is created in real-time, allowing users increased transparency.
Application Layer
The Application layer has a consumer interface. This is where all the applications are present. Conversion occurs at this layer, as the protocols are converted into user-friendly services. The key function of this layer is that it allows an individual to buy, trade and sell their digital assets
Aggregation Layer
This layer acts as a bridge to connect applications to their investors. The seamless transaction is caused due to the elimination of paperwork. This measure then enables stakeholders to maximize their returns. Services such as lending and borrowing exist at this level.
Is DeFi the Future?
DeFi is growing exponentially and is likely to dominate the future. Since August, the locked-in DeFi contracts have increased from $6.9 billion to a whopping $11.1 billion. This massive growth in such a short period is representative of a financial bubble.
DeFi is an innovative and unique concept, but it lacks real-world practicality. The system’s shortfall lies in its inability to trace money and the absence of a regulatory body. Hence, making it susceptible to fraud and money laundering activities. What are your thoughts regarding DeFi and its place in the financial sector?
